Because interest rates change constantly, what seems like a good rate at the time you buy may be much higher than typical rates just a few years later. Refinancing can bring your housing expenses more in line with what other people are paying.
Refinancing doesn't come cheaply, though. You often have to pay up-front fees and closing costs again, even if your mortgage is only a few years old. That's especially true when you switch lenders.
You may want to refinance your mortgage for several reasons:
- You can borrow at a lower interest rate, which will reduce your monthly payments and often the overall cost of the mortgage
- You may want to consolidate outstanding debt — for example, by combining a first and second mortgage into a single new one
- You may want to reduce the term of your loan, which while it may increase your monthly payment, will dramatically reduce your total cost
But every situation is different. To figure out whether you can save money by refinancing you need to consider:
- How much lower your monthly payments will be
- What refinancing costs you must pay
- How long you plan to stay in your home
- How many years remain on your current mortgage
Your best bet is to tell the lender what you paid for the house, what you still owe, and how much you're paying each month. Have the lender itemize all the up-front expenses involved in the refinance and estimate your new payments. Then you can figure when you will break even and start saving.
For example, if you save $1,600 in mortgage payments each year by refinancing, but it costs you $4,800 to refinance, you'll have to stay put more than three years to realize any savings.
A potential lender or real estate attorney should be able to help you compare the combined total interest you'd owe if you refinanced with the amount remaining on your existing mortgage. You can also use one of the refinancing calculators you can find on most bank and financial services company websites.
|Origination points (if any)||______||0|
|Attorney review (yours)||______||200|
|Attorney review (lender's)||______||200|
|Title search fee||______||50|
|Title insurance fee||______||400|
|Local fees (taxes, transfers)||______||1,000|
|Estimate for other costs||______||250|
|Prepayment penalty on your existing mortgage||______||0|
|Total of all fees on your new mortgage||______||5,120|
|Current mortgage's monthly payment*||______||769|
|New mortgage's monthly payment*||______||632|
|Difference between the two payments||______||137|
|Number of months to recoup costs (total of all fees, divided by the difference in monthly payments)||______||37 months|
WEIGHING YOUR CHOICES
You can arrange refinancing to switch from a fixed-rate loan to a loan with a lower rate, from an adjustable-rate loan to a fixed-rate (something that may be attractive if rates seem headed up), or from a fixed-rate loan to one of the hybrid adjustables, such as a 10-year fixed/20-year adjustable loan.
Refinancing moves in predictable patterns. A big drop in rates in the economy at large or the introduction of a new strain of loans provokes a flurry of activity, generally followed by a period of calm. Then the cycle may begin again.
WHAT IF YOU FALL BEHIND IN YOUR MORTGAGE PAYMENTS?Although lenders can foreclose your mortgage and begin the process of repossessing your home if you're 90 days behind in your payments, most will agree to less drastic measures. Some possible solutions:
- Add the amount you're behind to the end of the mortgage, which extends the term and cost of the loan
- Renegotiate with the lender to reduce each monthly payment and then pay the difference, plus the amount you're behind, at the end of the mortgage
- Temporarily reduce immediate payments and increase later ones, or make a balloon, or one-time, payment to catch up
- Increase future payments slightly until you've paid up the amount you're behind